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November 17, 2002
David Warsh, Proprietor


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Short Takes

The Bush Administration’s economic team apparently will remain intact — for now. Before the election, speculation surged that a shakeup was in the works. It centered on the president’s chief economic adviser Lawrence Lindsey. A better strategist than administrator, the 48-year-old Lindsey has seemed less than comfortable as director of the National Economic Council.

But last week Lindsey told an audience at the U.S. Chamber of Commerce that the administration was studying another stimulus package for early 2003. Since his specialty is supply-side manipulation of the tax code, he seems unlikely to abandon his conference-table seat before the administration’s plans have been laid.

The election results have touched off a flurry of behind-the-scenes maneuvering. Council of Economic Advisers chairman Glenn Hubbard, on leave from Columbia University, is a former deputy assistant Treasury secretary for tax analysis. His stock has been rising.

Treasury Secretary Paul O’Neill has a long-standing interest in replacing the personal income tax with some form of consumption taxation — perhaps a European-style value-added tax. Such proposals are prepared by the department he heads.

 

Federal Reserve Chairman Alan Greenspan, looking to rebuild his reputation for sagacity, last week urged caution in pursuing further tax cuts as a means to stimulate the economy.

And behind the scenes, as ever, is Harvard economist Martin Feldstein, thesis adviser to both Lindsey and Hubbard. Feldstein is considered a leading candidate to replace Greenspan, who could choose to retire next year before his term expires in the summer before the 2004 election.

An economic team shakeup may not be imminent. But it looms.

* * *

Microsoft chairman Bill Gates was in India last week, writing checks to support local education, information technology infrastructure and AIDS prevention. The week before he was in east of the mountains in Washington state, surveying the last stage of a five-year effort to put computers in every rural library in the United States. His charitable foundation (which moved out of equities and into T-bills near the height of the bubble) is now giving away $1.2 billion a year.

Little noted were the remarkable stakes of his journey to the subcontinent, except by reporter Saritha Rai, writing in the New York Times (registration required.) “Mr. Gates’ visit, his third to India, comes as programmers around the world, are being lured to join the so-called open-source computing movement, which favors the Linux operating system — available free or in low-cost software packages — over proprietary systems like Microsoft Windows,” she wrote.

The issues here are fascinating. It’s not just the Indian market for operating system software that is up for grabs — millions of computers in the next ten years. The Europeans and American markets, which now belong almost entirely to Microsoft, are at stake, too.

Linux, a close relative to the Unix computer operating system that was expensively developed by AT&T in the 1970s, then given away to universities in the wake of the Bell system’s breakup, is the only operating software that can give Microsoft’s Windows a run for its money. And, in fact, many if not all computer programmers consider it superior in principle to Microsoft’s shrink-wrapped code — less prone to crash, easier to adapt.

The problem is that no company can afford to invest in the hundreds of thousands of hours of code-writing that would be necessary to create and maintain a truly polished alternative to the constantly up-dated Microsoft system. So far Linux and its various applications have been written mostly by volunteers and distributed free to computer professionals, who then share their debugging efforts or “patches.”

 

Suppose the Indian government were to throw its weight behind the development of the Linux system? The software development community in India has grown to become one of the world’s most sophisticated in recent years. Given the potentially enormous domestic market of the subcontinent, Indian companies presumably could build a suite of products in short order that could compete effectively against Microsoft products first at home, then in American and European markets.

The thought clearly has occurred to the government in New Delhi. India’s military sites and research universities have been using Linux for years, Rai reported. The national stock exchange has embraced it; corporations are beginning to convert. And India’s Department of Information Technology recently leaked news of a broad new “Linux India Initiative” designed to attract developers — just a few weeks before Gates’ visit.

China, meanwhile, is even more aggressive in promoting open-source development in its nascent software industry, according to reporter Rai. Pakistan recently switched its government science and technology servers to Linux. Those who want to use more expensive Microsoft software — or accept the company’s gifts — must justify their request. And of course there is Russia, whose software engineers are unaccustomed to thinking of themselves as taking a backseat to the Indians.

Already Microsoft has dodged one unanticipated challenge to its supremacy — the Web browser developed by Netscape. Such “middleware,” if it had remained in the hands of another company, would have “commoditized” Microsoft’s proprietary operating systems and rendered them far less profitable. Hence Microsoft’s all-out determination to replace Netscape’s Navigator with its own Explorer.

And even though it was convicted of antitrust violations in the so-called Browser Wars, the company beat back the US government’s proposed remedy for its lawlessness on appeal. The Justice Department sought to break the company into two basic entities — an operating systems company and a company that would write applications for those systems. Instead, Microsoft has remained intact to battle for the global market. It may yet turn out that its shareholders and employees would have done better to accept the government’s remedy.

British cotton manufacturers in the 19th century would ask one another, “Can you imagine if every man in China added just one inch to his shirt-tail?” Chinese and Indian software developers in the 21st century may be contemplating the reverse, concerning code rather than cotton — an operating system that would be both cheaper and easier to use than the proprietary one that Microsoft pioneered and to which it is bound.

Far-fetched? Something of the sort happened with automobiles.

* * *

Back in August 1996, an up-and-coming investor in the Russian economy named Elizabeth Hebert needed a little cash — $400,020 to be precise.

Forum Financial Group, a little financial services company based in Portland, Maine, had failed in its attempt to become the first company licensed to sell mutual funds in Russia. Now it had decided to sell its unit, First Russian Specialized Depository (FRSD).

 

Having moved to Moscow from London a couple of months earlier to start an asset management company of her own, Hebert wanted to buy it for her firm.

So she turned to her boyfriend’s father, a physician in Nampa, Idaho, for a loan. That’s when things started to get hazy.

 

Hebert ‘s boy friend was Jonathan Hay, a Rhodes scholar and Harvard Law school graduate who was then working for Harvard in Moscow. Hay was resident director of a US government-sponsored project to advise the Russian government. His boss was Harvard economics professor Andrei Shleifer, the overall project director.

Hay apparently considered using his own money to buy FRSD. But, he later testified, he was worried that he might no longer be able to work for the project because of the conflict of interest that ownership would create.

The next thing anyone knew, his girlfriend was borrowing $400,020 from Hay’s father.

Hebert apparently didn’t tell Hay she was asking for the money — at least he testified that he didn’t remember if she did. The father called his son, then made the loan, taking half the money from his son’s account — a fact Hay says his father didn’t bother to mention for another week, at which point he says he simply told Shleifer what had happened. His father sent the money directly to Hebert’s partner, Julia Zagachin, another Harvard employee who worked for both Shleifer and Hay. She promptly bought the firm.

 

Only when the US government began to investigate the Moscow project eight months later did the principals scramble to repay the money and unwind the deal.

 

When Forum Financial learned of the results of the government investigation, it sued Harvard in US District Court in Portland, claiming that Hay had lured them in and then bought them out while operating under the university’s escutcheon. Harvard countered that Forum simply had made the Russians mad, that Hay had tried to help, and that in any event Harvard itself bore no responsibility.

Earlier this month Harvard paid Forum an undisclosed sum to settle the case. Forum had sought up to $4.5 million, plus compensatory damages, punitive damages and costs.

Meanwhile, in Boston, the main event is going forward — the government’s $103 million claim against Harvard for failing to exercise proper oversight of its Russia project. Next, US District court Judge Douglas Woodlock wants to know whether the case really warrants the treble damages the government is seeking under the False Claims Act, or whether a simple breach of contract finding would be more fitting.

* * *

Rene Thom died last week. For a little while in the 1970s, the French mathematician was in the science news and even the business press as the father of “catastrophe theory.” That was before the enthusiasm for “chaos” and “complexity” took cover.

In 1958 Thom won the Fields Medal, the mathematics equivalent of a Nobel Prize, at the age of 35 for his work in differential topology. Catastrophe theory emerged in 1972 with the publication of “Structural Stability and Morphogenesis: An Essay on the General Theory of Models.” A particularly good obituary appeared in the Times of London last week.

I am not mathematically acute but I enjoy occasionally reading good expositions of developments written for lay audiences. I accept that much of what mathematicians do they do for themselves. But I also recognize that the tools they have lent to scientists, calculus in particular, but recently an increasing variety of methods, have been instrumental in creating the modern world, from computer chips to moon rockets to genomics. Catastrophe theory was one of those ideas that attracted much attention outside the field, provoked a significant backlash within.

 

One mathematician who has much sympathy for Thom is Invar Ekeland, director general of the Institute of Finance at the University of Paris — Dauphine. Some years ago Ekeland wrote a graceful little book called Mathematics and the Unexpected to convey the spectacular progress he felt had been made in understanding time and change. Catastrophe theory had been part of this advance, he argued. It was a way of modeling how slow, progressive modifications sometimes could bring about swift, abrupt changes.

Just as Kepler’s three laws had yielded an image of planets revolving around the sun in elliptical orbits that had become “one of the constant but unspoken references of modern thought,” Ekeland wrote, so had the discoveries of three mathematicians in particular had contributed images suitable to the post-modern age.

“Nowadays a few striking pictures — Arnold’s cat, Smale’s horseshoe, Thom’s cusp — are contenders for a similar influence. They have awakened an echo in all domains of science, and they will soon belong to our cultural background, like family portraits hanging on a wall, pictures so well known that they cease to catch the eye, so that one has to remove them and feel the resulting vacuum to experience how important they really are.”

Thom’s cusp usually is represented as a three-dimensional picture, as if a sheet of paper were gently bent back on itself, ribbon-candy-fashion. There is an upstairs portion of the plane; there is a downstairs. Movement along its curvature may represent any kind of a dynamical system.

Catastrophe theory, says Ekeland, describes the major changes in a system’s internal variables of the system that may occur subsequent to minor changes in its external variables — as when an upstairs state suddenly goes downstairs and vice versa. Thom identified folds representing what he called seven “elementary” catastrophes — each a distinctly different departure from a previously stable equilibrium.

Well, maybe. Some mathematicians were quick to attack. The relevance of the models was disputed. “At times, it felt like a comedy,” Ekeland recalls. “Unfortunately, some of the most popular applications of catastrophe theory are in the behavioral or social sciences, where it has been used to model everything from mutinies in prisons to attack patterns of dogs. There is no theoretical justification to such models; they are at best an educated guess from a mathematician.”

Although Ekeland doesn’t mention it, Thom’s choice of the word “catastrophe” to signify a rapid departure from a previous mode of change probably stemmed from its usage in a many-faceted debate that sprawled for a time in the early 19th century over the newly-coalescing fields of geology and paleontology.

“Uniformitarians” were those who asserted that existing forces, given enough time, were sufficient to account for all the aspects of the earth. “Catastrophists” insisted that only cataclysms could explain the strange fossil evidence that was beginning to accumulate. Miracles? Revolutions? The debate was complicated by frequent references to the Biblical flood and the political rivalries between England and France.

In the end, the catastrophists won out. Orbital perturbations and periodic ice ages turn out to have been the least of it. Most scientists now believe that giant meteors hitting the earth with devastating force — one or many — played the crucial role in causing the extinction of the dinosaurs and myriad other species.

Who knows what mechanisms of social change economists have yet to fathom? All the more reason to someday peruse a copy of “Mathematics and the Unexpected.”

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